A Matter of Life and Death
How important is economics?
JANUARY 11, 2011 by SANDY IKEDA
I had the privilege of studying under Israel M. Kirzner at New York University in the 1980s. In 2006 Professor Kirzner, one of Ludwig von Mises’s most gifted American students, was given a lifetime achievement award from the Society for the Development of Austrian Economics. In his acceptance speech he made the rather startling statement that the most important lesson he learned from Mises, one of the greatest economic theorists of his age, had nothing directly to do with economic theory at all. Rather, it was that the study and teaching of economics are literally matters of life and death.
Now a colleague of mine, a respected Austrian economist, has expressed profound skepticism that “abstract theorizing” could “save the world.” I was inclined to agree – although I think it can profoundly change the world. Still the exchange has forced me to articulate my thoughts.
What I Think It Means
Will an economic argument stop someone from firing a bullet at my heart or keep an army from destroying my community? I doubt it very much. Whether the weapon is a gun, an army, or even monetary policy, abstract theorizing or indeed any kind of rational argument, economic or otherwise, would be unlikely to stop anyone who is determined to do harm. Does that make Kirzner’s assertion — that economics is a matter of life and death — wrong or naïve?
Perhaps Mises conveyed this lesson merely to make the economist feel good about herself because abstract theorizing can help her understand social reality more clearly, even while the bullet pierces her heart or troops raze her city. Perhaps Mises only wanted to motivate his students to commit their lives to the serious study of economics instead of, say, theoretical physics or the law.
Mises probably made two of the more important arguments proposed by any economist of the twentieth century. One was that it would not be unusual under socialism for, say, large food surpluses to coexist with mass starvation because, in the absence of private ownership of capital and labor, entrepreneurs could not use market prices to calculate profits and losses. Rational economic calculation would be impossible.
The other is that interventionism, the doctrine of the mixed economy, is inherently unworkable because knowledge and incentive problems will generate negative unintended consequences that will tend to elicit even more intervention. So price controls produce chronic shortages or surpluses, credit expansion ignites booms and busts, and income redistribution raises unemployment and lowers productivity.
A video making the rounds on the Internet the past few weeks shows how in the past 150 years or so, since the spread of free trade and free markets, life expectancy and per-capita income have gone through the roof all around the world. Ideas have consequences, and this development is the fruit of free-trade arguments made by nineteenth-century pamphleteers, many of whom were inspired by the “abstract theorizing” about free trade and the Invisible Hand propounded by classical economists such as Adam Smith and David Ricardo. (I thank Pete Boettke for introducing the video in relation to this topic.)
Now did Mises’s argument about the impossibility of rational economic calculation under socialism prevent the Spanish flu from killing millions just after World War I? Of course not. Did it delay the onset of World War II? Probably not. But did it prevent some governments after the war from becoming communist? Well, in his posthumously published Notes and Recollections, Mises boldly claims: “It was solely through my efforts that Bolshevism did not prevail in Vienna” (77). If this is true, then the answer is yes. Is that a good thing? I certainly think so because economic theory provably saved lives from the ruin and poverty that Mises predicted would follow the implementation of socialism or extreme economic interventionism, not to mention the terrible moral and psychological consequences described by F.A. Hayek in The Road to Serfdom.
Although it may not be possible to say definitively, Mises’s and other market economists’ abstract theories probably laid the intellectual foundation of the Thatcher and Reagan revolutions in the 1980s that, again, significantly improved well-being, at least for as long as they were consistently followed. The story is told that when Margaret Thatcher became the leader of the Conservative party in 1975, she produced a copy of Hayek’s The Constitution of Liberty during a meeting at the Institute of Economic Affairs, banged it on the table, and proclaimed, “[T]his is what we believe!”
Readers of The Freeman are already aware that the arguments of Mises and Hayek (among others) are informing the case today against so-called “quantitative easing” and intervention in health care in the United States. Will these arguments prevail and stem dangerous policies? Will they reduce human misery and increase human happiness? Obviously, no one knows, but if those of us who write for this publication and others like it didn’t believe it were possible, well, we would be wasting our time. I don’t think we are.
The Relative Importance of Economics
Proponents of Shakespeare or medical research or even Pilates might also say, perhaps with some justification, that the study of these things is also a matter of life and death. But in the final paragraph of Human Action (hat tip again to Pete Boettke), Mises writes:
The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built.
Thus the flourishing of the arts and sciences itself presupposes a system that respects the basic lessons of economics: that people follow incentives, knowledge is not perfect, and market prices promote social cooperation. Mises concludes:
But if [men] fail to take the best advantage of [economic knowledge] and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.
Of course, while some abstract theorizing in economics produces prosperity, other theorizing has produced and will produce disaster, and it may be hard sometimes to tell the difference between them. Either way, though, economics is still a matter of life and death.
Professor Kirzner’s talk made me remember why I wanted to become an economist in the first place (apart from its being a mostly honest way to make a living).